Consumer Duty of Care Regulation: A recap.

INTRODUCTION

In May 2021, the FCA published a Consultation Paper in which they propose introducing a new “Consumer Duty” for financial services firms dealing with consumers.

The new Consumer Duty would reinforce and complement the existing FCA Handbook requirements. The FCA has stated that its new expectations would also be compatible with other consumer protection legislation such as the Consumer Rights Act 2015, the Enterprise Act 2002 and the Consumer Protection from Unfair Trading Regulations 2008.

The new Consumer Duty is proposed to have three components:

A new Consumer Principle

The new Consumer Principle would be a new addition to the FCA’s Principles for Businesses.

The existing principles are:1

Integrity

A firm must conduct its business with integrity.

2

Skill, care and diligence

A firm must conduct its business with due skill, care and diligence.

3

Management and control

A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.

4

Financial prudence

A firm must maintain adequate financial resources.

5

Market conduct

A firm must observe proper standards of market conduct.

6

Customers' interests

A firm must pay due regard to the interests of its customers and treat them fairly.

7

Communications with clients

A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading.

8

Conflicts of interest

A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.

9

Customers: relationships of trust

A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.

10

Clients' assets

A firm must arrange adequate protection for clients' assets when it is responsible for them.

11

Relations with regulators

A firm must deal with its regulators in an open and cooperative way, and must disclose to the FCA appropriately anything relating to the firm of which that regulator would reasonably expect notice.

The FCA has proposed two options for the wording of the new Consumer Principle, which it is seeking feedback on.

Option 1, states that? “A firm must act to deliver good outcomes for retail clients”.

This option extends Principle 6 and underlines that firms should focus on the impact of their actions on consumers, not simply on processes.

Option 2, states that “A firm must act in the best interests of retail clients”.

This does not require firms to deliver the absolute best outcomes, but firms should be comfortable that their conduct could reasonably and objectively be said to be in the consumers’ best interests and equip consumers to be able to make decisions in their best interests.

Three Cross-Cutting Rules or Key Behaviours:

The FCA proposes implementing three key behaviours that it expects from firms.

The three key behaviours proposed by the FCA will require firms to:

1. Take all reasonable steps to avoid causing foreseeable harm to customers.
2. Take all reasonable steps to enable customers to pursue their financial objectives.
3. Act in good faith.

The FCA’s proposals note that these behaviours will need to be interpreted by firms in the context of:

• The nature of the product/service offered (i.e. high levels of complexity will require further information/assistance for customers).
• The relevant distribution chain.
• Consumers' reasonable expectations for that particular service/product (i.e. where the added value marketed by the firm is to be delivered via customer service).
• The specific characteristics of the customers (i.e. vulnerability)

Take all reasonable steps to avoid causing foreseeable harm to customers.

The FCA note that firms should not seek to exploit customers’ vulnerabilities, behavioural biases or lack of knowledge (i.e. by disguising/burying key terms in documents, etc).

B. Take all reasonable steps to enable customers to pursue their financial objectives

The FCA’s proposals do not provide extensive guidance on how they will seek to interpret these behaviours in practice.?

C. Act in good faith

The FCA explains that this behaviour reflects a standard of conduct characterised by honesty, fair and open dealing and consistency with consumers' reasonable expectations. This behaviour is intended to take account of the usual imbalance in the relationship between firms and customers (i.e. asymmetrical knowledge, bargaining power, expertise, etc). The FCA has clarified that these behaviours are not intended to introduce a fiduciary duty between the firm and the customer that does not already exist.

3. The four outcomes

The FCA proposes to implement four outcomes that represent the key elements of the firm-consumer relationship, namely how firms design, sell and service products and services and the critical contact points along the customer journey.?

The four outcomes proposed by the FCA relate to:

1. Communications to equip consumers to make effective, timely and adequately informed decisions about financial products and services.
2. ?Products and services are specifically designed to meet the needs of consumers and sold to those whose needs they meet.
3. Customer service meets the needs of consumers, enabling them to realise the benefits of products and services and acts in their interests without undue hindrance.
4. The price of products and services represents fair value for consumers.

1. Communications

The FCA’s proposals state that a firm’s communications are meant to consistently support consumers by enabling them to make informed decisions about financial products and services. This broadly means that firms will be expected to ensure that customers are given the information they need at the right time and presented in a way that they can understand.

2. Product and services

The FCA’s proposals on the products and services outcome primarily seek to build on firms' existing product governance requirements. Firms are expected to comply with these obligations through the lens of the Consumer Principle and the cross-cutting rules noted above.

3. Customer service

The FCA summarises this point saying that customers should be able to realise the benefits of their product/services, and should not be hindered from acting in their own interests.

4. Price and Value

The FCA’s proposals note that this outcome is intended to ensure that products and services are fit for purpose and represent fair value. This means that firms should ensure that the benefits of the products and services offered to consumers are reasonable relative to their price.

CONCLUSION

Whilst describing the proposals as a “paradigm shift” in its expectations of firms in retail markets the FCA stresses that the new Consumer Duty would not:

• Remove consumers’ responsibility for decision making or, in itself, prevent consumers from making decisions that are not in their interests.
• Require that all consumers of a product or service obtain the same terms or outcome.
• Impose an open?ended duty that goes beyond the scope of the firm’s role and its ability to determine or influence consumer outcomes, or protect consumers from all potential harms.
• Remove or supersede the need for specific rules or guidance, which may be necessary to mitigate specific consumer harms.
• Specify exactly how firms should act.
• Apply retrospectively to past business. Nor does the FCA intend to judge practices with the benefit of hindsight.

The rules and guidance which will introduce the new Consumer Duty will be in place by 31 July 2022.?